Quarterly Report (10-q)

Date : 05/10/2019 @ 8:56PM
Source : Edgar (US Regulatory)
Stock : Evans & Sutherland Computer Corp. (PC) (ESCC)
Quote : 0.7  0.0 (0.00%) @ 7:38PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

__________________________________________________

 

FORM 10-Q

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,

 

For the quarterly period ended March 29, 2019

or

[   ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,

 

For the transition period from _____ to _____

 

Commission file number 001-14677

__________________________________________________

 

EVANS & SUTHERLAND COMPUTER CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Utah

(State or Other Jurisdiction of

Incorporation or Organization)

87-0278175

(I.R.S. Employer

Identification No.)

 

770 Komas Drive, Salt Lake City, Utah

(Address of Principal Executive Offices)

 

84108

(Zip Code)

 

Registrant's Telephone Number, Including Area Code:  (801) 588-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X    No__

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes   X  No __

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]

Accelerated filer [  ]   

Non-accelerated filer [X]   

Smaller reporting company [X]

Emerging growth company [  ]

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes __ No X  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.20 par value

ESCC

Over-the-Counter Markets

 

The number of shares of the registrant’s Common Stock (par value $0.20 per share) outstanding on May 10, 2019 was 11,482,516.



FORM 10-Q

 

Evans & Sutherland Computer Corporation

 

Quarter Ended March 29, 2019

 

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Page No.

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 29, 2019 and December 31, 2018 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 29, 2019 and March 30, 2018 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 29, 2019 and March 30, 2018 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 29, 2019 and March 30, 2018 (Unaudited)

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

1 5

 

 

 

Item 4.

Controls and Procedures

18

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

19

 

 

 

Item 6.

Exhibits

19

 

 

 

SIGNATURE

 

20



PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS  

 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands, except share and per share data)

 

 

 

March 29,

 

December 31,

 

 

2019

 

2018

 

 

 

 

 

(As Adjusted)

ASSETS

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,244   

 

$

8,365   

Restricted cash

 

 

251   

 

 

220   

Accounts receivable, net

 

 

3,794   

 

 

3,250   

Current portion of lease receivable

 

 

266   

 

 

262   

Contract revenue in excess of billings

 

 

2,525   

 

 

3,484   

Inventories, net

 

 

3,350   

 

 

3,072   

Prepaid expenses and deposits

 

 

777   

 

 

655   

Total current assets

 

 

17,207   

 

 

19,308   

Long-term lease receivable, net of current portion

 

 

506   

 

 

574   

Operating lease right-of-use asset

 

 

49   

 

 

187   

Property and equipment, net

 

 

4,387   

 

 

4,395   

Goodwill

 

 

635   

 

 

635   

Other assets

 

 

2,159   

 

 

2,249   

Total assets

 

$

24,943   

 

$

27,348   

 

 

 

 

 

 

 

LIABILITIESANDSTOCKHOLDERS’EQUITY   

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,263   

 

$

1,527   

Accrued liabilities

 

 

1,303   

 

 

1,059   

Billings in excess of contract revenue

 

 

4,414   

 

 

5,959   

Current portion of operating lease liability

 

 

49   

 

 

188   

Current portion of retirement obligations

 

 

643   

 

 

621   

Current portion of pension settlement obligation

 

 

438   

 

 

438   

Current portion of long-term debt

 

 

240   

 

 

237   

Total current liabilities

 

 

8,350   

 

 

10,029   

Retirement obligations, net of current portion

 

 

3,533   

 

 

3,601   

Pension settlement obligation, net of current portion

 

 

4,042   

 

 

4,042   

Long-term debt, net of current portion

 

 

1,241   

 

 

1,303   

Total liabilities

 

 

17,166   

 

 

18,975   

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, no par value: 10,000,000 shares authorized;

no shares outstanding

 

 

-   

 

 

-   

Common stock, $0.20 par value: 30,000,000 shares

authorized; 11,746,866 shares issued

 

 

2,349   

 

 

2,323   

Additional paid-in-capital

 

 

53,988   

 

 

53,967   

Common stock in treasury, at cost, 264,350 shares

 

 

(3,532)  

 

 

(3,532)  

Accumulated deficit

 

 

(43,052)  

 

 

(42,409)  

Accumulated other comprehensive loss

 

 

(1,976)  

 

 

(1,976)  

Total stockholders’ equity

 

 

7,777   

 

 

8,373   

Total liabilities and stockholders’ equity

 

$

24,943   

 

$

27,348   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


3



EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

( Unaudited ) ( In thousands, except per share data )

 

 

 

Three Months Ended

 

 

March 29,

 

March 30,

 

 

2019

 

2018

 

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

Sales

 

$

7,165   

 

$

7,581   

Cost of sales

 

 

(4,961)  

 

 

(4,972)  

    Gross profit

 

 

2,204   

 

 

2,609   

Operating expenses:

 

 

 

 

 

 

    Selling, general and administrative

 

 

(1,817)  

 

 

(1,773)  

    Research and development

 

 

(902)  

 

 

(767)  

    Pension

 

 

(57)  

 

 

(54)  

         Total operating expenses

 

 

(2,776)  

 

 

(2,594)  

 

 

 

 

 

 

 

         Operating income (loss)

 

 

(572)  

 

 

15   

Other expense, net

 

 

(71)  

 

 

(75)  

Loss before income tax provision

 

 

(643)  

 

 

(60)  

    Income tax provision

 

 

-   

 

 

(11)  

         Net loss

 

$

(643)  

 

$

(71)  

 

 

 

 

 

 

 

Net loss per common share – basic and diluted

 

$

(0.06)  

 

$

(0.01)  

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

 

 

 

 

 

and diluted

 

 

11,406   

 

 

11,353   

 

The accompanying notes are an integral part of these condensed consolidated financial statements


4



EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

( Unaudited ) ( In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

Common Stock

 

Paid-in

 

Treasury

 

Accumulated

 

Comprehensive

 

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Deficit

 

Loss

 

Total

Balance, December 31, 2017

 

11,617   

 

$ 2,323   

 

$ 53,818   

 

$ (3,532)  

 

$ (47,208)  

 

$ (2,176)  

 

$ 3,225   

Balance at January 1, 2018, as previously reported

 

11,617   

 

2,323   

 

53,818   

 

(3,532)  

 

(47,208)  

 

(2,176)  

 

3,225   

Impact of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

policy topic 606

 

-   

 

-   

 

-   

 

-   

 

683   

 

-   

 

683   

Impact of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

policy topic 842

 

-   

 

-   

 

-   

 

-   

 

808   

 

-   

 

808   

Adjusted balance at January 1, 2018

 

11,617   

 

2,323   

 

53,818   

 

(3,532)  

 

(45,717)  

 

(2,176)  

 

4,716   

Net loss

 

-   

 

-   

 

-   

 

-   

 

(71)  

 

-   

 

(71)  

Stock-based compensation

 

-   

 

-   

 

39   

 

-   

 

-   

 

-   

 

39   

Balance, March 30, 2018 (as adjusted)

 

11,617   

 

$ 2,323   

 

$ 53,857   

 

$ (3,532)  

 

$ (45,788)  

 

$ (2,176)  

 

$ 4,684   

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

Common Stock

 

Paid-in

 

Treasury

 

Accumulated

 

Comprehensive

 

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Deficit

 

Loss

 

Total

Balance, December 31, 2018  (as adjusted)

 

11,617   

 

$ 2,323   

 

$ 53,967   

 

$ (3,532)  

 

$ (42,409)  

 

$ (1,976)  

 

$ 8,373   

Net loss

 

-   

 

-   

 

-   

 

-   

 

(643)  

 

-   

 

(643)  

Exercise of stock options

 

130   

 

26   

 

(5)  

 

-   

 

-   

 

-   

 

21   

Stock-based compensation

 

-   

 

-   

 

26   

 

-   

 

-   

 

-   

 

26   

Balance, March 29, 2019

 

11,747   

 

$ 2,349   

 

$ 53,988   

 

$ (3,532)  

 

$ (43,052)  

 

$ (1,976)  

 

$ 7,777   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


5



EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

 

 

 

Three Months Ended

 

 

March 29,

 

March 30,

 

 

2019

 

2018

 

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(643)  

 

$

(71)  

Adjustments to reconcile net loss to net cash used in

operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

66   

 

 

67   

Provision for excess and obsolete inventory

 

 

-   

 

 

99   

Noncash lease expense

 

 

138   

 

 

130   

Other

 

 

(16)  

 

 

93   

Changes in operating assets and liabilities:

 

 

 

 

 

 

Increase in accounts receivable

 

 

(502)  

 

 

(1,190)  

Decrease in lease receivable

 

 

64   

 

 

60   

Increase in inventories

 

 

(278)  

 

 

(446)  

Decrease (increase) in contract revenue in excess of billings

 

 

959   

 

 

(752)  

Increase in prepaid expenses and other assets

 

 

(32)  

 

 

(95)  

Decrease in accounts payable

 

 

(264)  

 

 

(492)  

Increase in accrued liabilities

 

 

244   

 

 

347   

Decrease in accrued pension and retirement liabilities

 

 

(46)  

 

 

(61)  

Increase (decrease) in billings in excess of contract revenue

 

 

(1,545)  

 

 

2,054   

Decrease in operating lease liability

 

 

(139)  

 

 

(129)  

Net cash used in operating activities

 

 

(1,994)  

 

 

(386)  

 

 

 

 

 

 

-   

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(58)  

 

 

(14)  

Proceeds from sale of property and equipment

 

 

-   

 

 

3   

Net cash used in investing activities

 

 

(58)  

 

 

(11)  

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds for shares issued on exercise of options

 

 

21   

 

 

-   

Principal payments on long-term debt

 

 

(59)  

 

 

(55)  

Net cash used in financing activities

 

 

(38)  

 

 

(55)  

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(2,090)  

 

 

(452)  

Cash, cash equivalents, and restricted cash as of beginning of the period

 

8,585   

 

 

5,588   

Cash, cash equivalents, and restricted cash as of end of the period

 

$

6,495   

 

$

5,136   

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

22   

 

$

25   

Income taxes

 

 

9   

 

 

25   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


6


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


All dollar amounts (except share and per share amounts) in thousands.

 

1. GENERAL  

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company” or “E&S”) have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, and cash flows, in conformity with U.S. generally accepted accounting principles (“US GAAP”).  This report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2018.

 

The accompanying unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows.  The results of operations for the three months ended March 29, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.  The Company operates on a calendar year with the first three fiscal quarters ending on the last Friday of the thirteenth week in the quarter.  

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) . In accordance with Topic 606, the Company recognizes revenue at a point of time or over the time of performance depending on the nature of the obligation.

 

Stock-Based Compensation

 

Compensation cost for all stock-based awards is measured at fair value on the date of grant and is recognized over the service period for awards expected to vest.  Determining the fair value of share-based awards at the grant date requires judgment, including estimating the value of share-based awards that are expected to be forfeited. Actual results and future estimates may differ from the Company’s current estimates.

 

Net Loss Per Common Share

 

Basic net loss per common share is computed based on the weighted-average number of common shares outstanding during the period.  Diluted net loss per common share is computed based on the weighted-average number of common shares and dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents. When the Company incurs a loss, potentially dilutive common stock equivalents are excluded as their effect would be anti-dilutive, thereby decreasing the net loss per common share.


7


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Inventories, net

Inventories consisted of the following:

 

 

March 29,

 

December 31,

 

2019

 

2018

 

 

 

 

 

 

Raw materials

$

6,096   

 

$

5,979   

Work in process

 

181   

 

 

116   

Finished goods

 

419   

 

 

323   

Reserve for obsolete inventory

 

(3,346)  

 

 

(3,346)  

Inventories, net

$

3,350   

 

$

3,072   

 

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases ( Topic 842) ("Topic 842"). Topic 842 changes the accounting for leases. In particular, lessees will recognize lease assets and lease liabilities for operating leases. Effective January 1, 2019, the Company implemented Topic 842 as described in Note 3.


8


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


2.    REVENUE

Disaggregation of Revenue

In the following tables, revenue reported for the periods presented is disaggregated by primary geographical market, major product line, timing of revenue recognition and product application.

Three months ended March 29, 2019

 

 

 

 

Product Application

Planetarium Theaters

Other Visitor Attractions

Architectural Treatments

Total

 

 

 

 

 

Primary geographic area:

 

 

 

 

 

 

 

 

 

North America

$ 4,179  

$ 215  

$ 76  

$ 4,470  

Europe

1,373  

316  

-  

1,689  

Asia

485  

38  

-  

523  

Other

483  

-  

-  

483  

 

$ 6,520  

$ 569  

$ 76  

$ 7,165  

 

 

 

 

 

Products:

 

 

 

 

 

 

 

 

 

Audio-Visual Systems

$ 4,396  

$ 151  

$ -  

$ 4,547  

Domes

801  

418  

76  

1,295  

Show Content

771  

-  

-  

771  

Maintenance and Service

552  

-  

-  

552  

 

$ 6,520  

$ 569  

$ 76  

$ 7,165  

 

 

 

 

 

Timing of revenue recognition:

 

 

 

 

 

 

 

 

 

Goods transferred at point in time

$ 816  

$ -  

$ -  

$ 816  

Goods and services transferred over time

5,704  

569  

76  

6,349  

 

$ 6,520  

$ 569  

$ 76  

$ 7,165  


9


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Three months ended March 30, 2018

 

 

 

 

Product Application

Planetarium Theaters

Other Visitor Attractions

Architectural Treatments

Total

 

 

 

 

 

Primary geographic area:

 

 

 

 

 

 

 

 

 

North America

$ 3,133  

$ 120  

$ 360  

$ 3,613  

Europe

333  

11  

-  

344  

Asia

2,456  

847  

-  

3,303  

Other

321  

-  

-  

321  

 

$ 6,243  

$ 978  

$ 360  

$ 7,581  

 

 

 

 

 

Products:

 

 

 

 

 

 

 

 

 

Audio-Visual Systems

$ 3,986  

$ 11  

$ -  

$ 3,997  

Domes

1,375  

967  

360  

2,702  

Show Content

326  

-  

-  

326  

Maintenance and Service

556  

-  

-  

556  

 

$ 6,243  

$ 978  

$ 360  

$ 7,581  

 

 

 

 

 

Timing of revenue recognition:

 

 

 

 

 

 

 

 

 

Goods transferred at point in time

$ 481  

$ -  

$ -  

$ 481  

Goods and services transferred over time

5,762  

978  

360  

7,100  

 

$ 6,243  

$ 978  

$ 360  

$ 7,581  

 

Contract Balances

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of March 29, 2019:

 

March 29, 2019

December 31, 2018

 

 

 

Receivables reported as accounts receivable, net

$ 3,794  

$ 3,250  

Contract revenue in excess of billings

2,525  

3,484  

Billings in excess of contract revenue

4,414  

5,959  


10


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Significant changes in the contract assets and the contract liabilities balances during the period are as follows:

 

Contract Assets

Contract Liabilities

 

 

 

Revenue recognized that was included in the contract liability balance at the beginning of the period

 

$ (3,265)   

 

 

 

Increases due to amounts billed to customers, excluding amounts recognized as revenue during the period

 

$  1,720  

 

 

 

Transferred to receivables from contract assets recognized at the beginning of the period

$ (1,343)  

 

 

 

 

Increases as a result of revenue recognized, excluding amounts transferred to receivables during the period

$       384  

 

 

Contract assets arise when revenue recognized on a contract exceeds the cumulative progress billings. Contracts generally provide for an enforceable right to payment for performance completed to date but do not necessarily have a present right to consideration payment for performance completed until the event that triggers the progress billing. The contract assets are transferred to the receivables when the rights to payment occur and amounts are billed. Contract liabilities arise when progress billings on a contract exceed the revenue recognized. Contract liabilities are relieved as the performance obligation is completed and revenue is recognized. Progress billings vary among contracts and can be triggered by chronological milestones, performance events or other various measurements of performance.

Backlog of Remaining Customer Performance Obligations

The following table includes estimated revenue expected to be recognized and recorded as sales in the future from the backlog of performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.

 

 

Remainder of 2019

2020

2021

2022

2023

 

 

 

 

 

 

 

Sales

 

$ 14,233  

$ 535  

$ 256  

$ 54  

$ 50  

 

3.    OPERATING LEASE

The Company adopted Topic 842, Leases , effective January 1, 2019 and adjusted the 2018 comparative period presented by applying the new standard as of January 1, 2018. As a result, the 2018 periods presented for comparative purpose have been adjusted to reflect the application of Topic 842 with an adjustment to opening balance of stockholders’ equity at January 1, 2018 for cumulative effect of the initial application (see Note 4).

The Company leases its office, shop and warehouse space in Salt Lake City, Utah under a non-cancellable operating lease agreement with an amended term that ended on April 30, 2019 (the “ Facility Lease”). On April 15, 2019, the Company signed an amendment to the Facility Lease, for newly defined space with a term beginning on May 1, 2019 (see Note 7).  

 

As a result of the adoption of ASC 842, the Company recognized an operating liability with a corresponding right-of-use (“ROU”) asset of the same amount based on the present value of the minimum rental payments of the Facility


11


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Lease as of January 1, 2018.   The discount rate used to compute the present value of the minimum rental payments of the lease is the Company’s estimated borrowing rate of 7.5%.  The operating lease expense is computed on straight-line basis which amounted to $142 reported as rent expense in each of the three-month periods presented.

 

Balance sheet information related to the lease is as follows:

 

 

 

 

March 29,

 

December 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

Operating lease right-of-use asset

 

 

$

49   

 

$

187   

Operating lease liability, current portion

 

 

 

49   

 

 

188   

 

Maturities of the lease liability is as follows:

 

Future Minimum Lease Payments

 

 

 

 

2019

 

$

47

 

Other information related to the lease:

 

 

 

 

March 29,

 

March 30,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

Operating cashflows

 

 

 

 

 

 

 

Cash paid related to operating lease obligation

 

 

$

143   

 

$

137   

Remaining lease term (in years)

 

 

 

 

 

 

 

Operating lease

 

 

 

0.08   

 

 

1.08   

 

4.    CHANGES IN ACCOUNTING PRINCIPAL

As described in Note 3, the Company adopted Topic 842 Leases , effective January 1, 2019 resulting in the retrospective adjustment of the comparative 2018 periods presented. Prior to the application of Topic 842, the rent expense was recorded in the amount of the lease payments, adjusted on straight-line basis over the lease term, less the amortization of a deferred gain from a 2014 sale leaseback transaction.  Under Topic 842, this gain would be recognized at the time of the transaction and not deferred. As a result, there was an adjustment to eliminate the unamortized balance of the deferred gain for cumulative effect of the initial application which increased the opening balance of stockholders’ equity in the amount of $808 at January 1, 2018. The presented condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three-month period ended March 30, 2018 is adjusted to reflect an increase in rent expense in the amount of $110. The balance sheet presented as of December 31, 2018 is adjusted to reflect the ROU asset and operating lease liability described in Note 3 along with an increase stockholders’ equity of $369.


12


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


5. STOCK OPTION PLAN  

 

As of March 29, 2019, options to purchase 876,981 shares of common stock under the Company’s stock option plan were authorized and reserved for future grant.  

 

 

A summary of activity in the stock option plan for the three months ended March 29, 2019 follows (shares in thousands):

 

 

 

 

Weighted-

 

 

 

Average

 

Number

 

Exercise

 

of Shares

 

Price

 

 

 

 

 

Outstanding as of beginning of the period

1,597   

 

$

0.65   

Granted

165   

 

 

0.80   

Exercised

(130)  

 

 

0.17   

Forfeited or expired

(40)  

 

 

0.66   

Outstanding as of end of the period

1,592   

 

 

0.71   

 

 

 

 

 

Exercisable as of end of the period

1,164   

 

$

0.61   

 

As of March 29, 2019, options exercisable and options outstanding had a weighted average remaining contractual term of 5.72 and 6.54 years, respectively, and had an aggregate intrinsic value of $317.

 

The Black-Scholes option-pricing model is used to estimate the fair value of options under the Company’s stock option plan.

 

The weighted average values of employee stock options granted under the stock option plan, as well as the weighted average assumptions used in calculating these values during the first three months of 2019, were based on estimates as of the date of grant as follows:

 

Risk-free interest rate

2.64%

Dividend yield

0.00%

Volatility

81.16%

Expected life

3.5 years

 

Expected option life and volatility are based on historical data. The risk-free interest rate is calculated based on the average US Treasury bill rate that corresponds with the option life.  Historically, the Company has not declared dividends and there are no foreseeable plans to do so.

 

The options exercised in the three-month period ended March 29, 2019 had an intrinsic value of $69.

 

As of March 29, 2019, there was approximately $122 of total unrecognized share-based compensation cost related to grants under the stock option plan that will be recognized over a weighted-average period of 2.4 years.

 

Share-based compensation expense included in selling, general and administrative expense in the statements of operations for the three-month periods ended March 29, 2019 and March 30, 2018 was $26 and $39, respectively.


13


 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


6. EMPLOYEE RETIREMENT BENEFIT PLANS  

Pension and Retirement Obligations

In 2015, the Company terminated a defined pension plan and settled the resulting liabilities in exchange for a fixed obligation secured by the Company’s assets (the “Pension Settlement Obligation”). The remaining payments due under the Pension Settlement Obligation consist of eight installments of $750 to the Pension Benefit Guaranty Corporation due annually on October 31. The Pension Settlement Obligation is recorded net of imputed interest expense at 7%, as a liability on the balance sheet.

 

The Company’s only remaining pension obligation is the Supplemental Executive Retirement Plan (“SERP”).

Employer Contributions

The Company is not currently required to fund the SERP.  All benefit payments are made by the Company directly to those who receive benefits from the SERP.  As such, these payments are treated as both contributions and benefits paid for reporting purposes. The Company expects to contribute and pay SERP benefits of approximately $438 in the next 12 months.  

 

Components of Net Periodic Benefit Expense

 

 

Supplemental Executive

 

Retirement Plan

 

March 29,

 

March 30,

For the three months ended:

2019

 

2018

 

 

 

 

 

 

Interest cost

$

37   

 

$

34   

Amortization of actuarial loss

 

20   

 

 

20   

Net periodic benefit expense

$

57   

 

$

54   

 

7. SUBSEQUENT EVENTS  

On April 15, 2019, the Company signed the second amendment to the Facility Lease (“Lease Amendment”).  The Lease Amendment effectively terminated, as of April 30, 2019, the current term of the Facility Lease, which was previously set to expire October 2019.  Under the Lease Amendment, effective May 1, 2019, the Company will continue to lease 60% of the space, while the other 40% will be leased from the Landlord by a third-party tenant.  The Company will continue to pay 100% of the maintenance and utility costs for the buildings and grounds, of which approximately 40% will be reimbursed by the third-party tenant in accordance with terms set by the Lease Amendment. The lease has a seven-year term with two five-year renewal options.  The monthly base rent will be $35 during the first year with a 3% escalation per year.  


14



Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company,”  “E&S,” “we,” “us” and “our”) included in Item 1 of Part I of this quarterly report on Form 10-Q.  In addition to the historical information contained herein, this quarterly report on Form 10-Q includes certain "forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, the Company’s goals, plans and projections regarding its financial position, results of operations, cash flows, market position, product development, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years.

 

Although the Company believes it has been prudent in its plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.

 

All dollar amounts are in thousands.

 

EXECUTIVE SUMMARY

 

As described in the notes to the condensed consolidated financial statements, the Company adopted Topic 842, Leases, with a date of the initial application of January 1, 2018. The Company applied Topic 842 by retrospectively adjusting the 2018 financial statements presented for comparison in this Form 10-Q. The retrospective adjustment increased the rent expense by $110 per quarter. The balance sheet effect of this increase in expense was offset by an adjustment for the cumulative effect of the application that resulted in a net increase to stockholders’ equity of $369 as of December 31, 2018.

 

The results for the first quarter of 2019 produced a net loss of $643 on sales of $7,165 compared to a net loss of $71 on sales of $7,581 for the comparable period of 2018, as adjusted for the application of Topic 842 described above. Sales for 2019 were lower due to the acceleration of customer deliveries in 2018 and a low volume of new customer orders. In addition to the lower sales, lower profit margins and higher operating expenses contributed to the 2019 net loss. The lower profit margins were attributable to the types of customer projects and higher fixed overhead as a percentage of sales. Operating expenses increased mainly due to an increase in Research and Development activities aimed at new business development.

 

The low volume of new customer orders decreased the sales backlog to $15,128 as of March 29, 2019 compared to $17,366 as of December 31, 2018. New orders to replenish the sales backlog will be critical to produce sales at sufficient levels for profitable results. We remain encouraged that the Company’s sales prospects will produce sufficient orders to sustain sales at profitable levels over the long term; however, we anticipate that the low backlog as of March 29, 2019 could continue to challenge profitability in 2019. Notwithstanding the loss in the first quarter of 2019, profitable results over the past few years have strengthened the Company’s financial position. This presents an opportunity in periods of low sales to redirect staff and resources, which would otherwise be working on customer projects, toward research and development activities to expand our products for future sales growth.


15



The Company continually evaluates its business for opportunities to reduce operating costs. These efforts led the Company to amend the lease for its facility in Salt Lake City effective May 1, 2019. Prior to the amendment the Company occupied 100% of two buildings totaling approximately 68,000 square feet. Upon review of its current requirements, the Company determined that its operations could be served efficiently with approximately 60% of its currently leased space. Under the Lease Amendment, effective May 1, 2019, the Company will lease approximately 60% of the current lease space, while the other 40% will be leased from the Landlord by a third-party tenant. The initial annual rent payments will be reduced $148 annually.  Also, the Company estimated that’s its utility and maintenance costs will be reduced by about $200 for a total estimated annual cost reduction of approximately $348.

 

CRITICAL ACCOUNTING POLICIES  

 

Certain accounting policies are considered by management to be critical to an understanding of our condensed consolidated financial statements.  Their application requires significant management judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain.  A summary of critical accounting policies can be found in our Form 10-K for the year ended December 31, 2018.  For all of these policies, management cautions that future results rarely develop exactly as forecasted, and the best estimates routinely require modification.  

 

RESULTS OF OPERATIONS

 

Sales and Backlog

 

The following table summarizes our sales:

 

 

 

Three Months Ended

 

 

March 29,

 

March 30,

 

 

2019

 

2018

 

 

 

 

 

 

 

Sales

 

$

7,165   

 

$

7,581   

 

The lower sales in 2019 were attributable to the acceleration of customer deliveries in 2018 and a low volume of new customer orders.

 

Revenue backlog decreased to $15,128 as of March 29, 2019, compared to $17,366 as of December 31, 2018. The decrease in the revenue backlog was mainly attributable to the high volume of sales from work on prior customer orders combined with a low volume of new orders booked in the first quarter of 2019.

 

Gross Profit

The following table summarizes our gross profit and the gross profit as a percentage of total sales:

 

 

 

Three Months Ended

 

 

March 29,

 

March 30,

 

 

2019

 

2018

 

 

 

 

 

 

 

Gross profit

 

$

2,204   

 

$

2,609   

Gross profit percentage

 

 

31 %

 

 

34 %

 

The mix of products delivered and the types of customer contracts that contributed to the revenue in the periods presented, causes variability in the gross profit percentage. Also, the low 2019 sales resulted in higher fixed overhead cost of as a percentage of sales.  


16



Operating Expenses

The following table summarizes our operating expenses:

 

 

 

Three Months Ended

 

 

March 29,

 

March 30,

 

 

2019

 

2018

 

 

 

 

 

 

 

Selling, general and administrative

 

$

1,817   

 

$

1,773   

Research and development

 

 

902   

 

 

767   

Pension

 

 

57   

 

 

54   

Total operating expense

 

$

2,776   

 

$

2,594   

 

Selling, general and administrative expenses were slightly higher in 2019 compared to 2018, mainly due to inflationary cost increases.

 

Research and development expenses were higher in 2019 due to the deployment of more engineering resources to R&D activities made possible by lower customer delivery activities. Research and development expenses generally vary with use of engineering resources for product improvement projects and customer delivery activities.

 

Pension expense increased slightly in 2019 compared to 2018 due to an increase in the interest cost on the SERP.

 

Other Expense, net

 

The following table summarizes our other expense:

 

 

 

Three Months Ended

 

 

March 29,

 

March 30,

 

 

2019

 

2018

 

 

 

 

 

 

 

Other expense, net

 

$

(71)  

 

$

(75)  

 

Other expense decreased in 2019 compared to 2018 mainly due to declining interest expense on the Pension Settlement Obligation and mortgage notes.   

 

LIQUIDITY AND CAPITAL RESOURCES

 

Outlook

As discussed above in the executive summary, we believe existing liquidity resources and funds generated from forecasted revenue will be sufficient to meet our current and long-term obligations. We continue to operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures.

Cash Flows

 

In the first three months of 2019, $1,994 of cash used in operating activities was attributable to $455 of cash used by the net loss for the period, after the effect of non-cash items of $188, and cash used by changes to working capital of $1,539. The significant uses of cash from changes to working capital were an increase in accounts receivable and a decrease in billings in excess of contract revenue.  This was partially offset by a decrease in contract revenue in excess of billings.  These changes are attributable to the timing of billings, customer payments and new customer orders.   


17



In the first three months of 2018, $386 of cash used in operating activities was attributable to $318 of cash provided by the net loss for the period, after the effect of non-cash items of $389 which was offset by cash used by changes to working capital of $704. The significant uses of cash from changes to working capital were increases in accounts receivable, contract revenue in excess of billings and inventory with a decrease in accounts payable. This was mostly offset by an increase in billings in excess of contract revenue resulting from advance billings to customers.  These changes are attributable to the timing of billings, customer payments and new customer orders.

 

Cash used in investing activities was $58 for the three months ended March 29, 2019 compared to $11 for the same period of 2018.  Investing activities for both periods presented consisted of property and equipment purchases. In 2018 investing activities included proceeds from the sale of equipment no longer being used.

 

For the three months ended March 29, 2019, financing activities used $38 of cash compared to $55 in 2018 for principal payments on mortgage notes.  Proceeds of $21 for the sale of common stock pursuant to the exercise of employee stock options partially offset the principal payments on the mortgage notes in 2019.

 

Line of Credit

 

The Company is a party to a line-of-credit agreement with a commercial bank which permits borrowings of up to $1,100 to fund the working capital requirements of Spitz. Under the line of credit agreement, interest is charged on amounts borrowed at the lender’s prime rate less 0.25%.  Any borrowings under the Credit Agreement are secured by Spitz real and personal property and all of the outstanding shares of Spitz common stock. The line-of-credit agreement and mortgage notes (with the same commercial bank) contain cross default provisions whereby a default on either agreement will result in a default on both agreements. There were no borrowings outstanding under the line-of-credit agreement as of March 29, 2019.

 

Letters of Credit

 

Under the terms of financing arrangements for letters of credit, the Company is required to maintain a balance in a specific cash account equal to or greater than the outstanding value of all letters of credit issued, plus other amounts necessary to adequately secure obligations with the financial institutions who issue the letters of credit.  As of March 29, 2019, there were outstanding letters of credit and bank guarantees of $251, which are scheduled to expire during the year ending December 31, 2019.  

 

Mortgage Notes

As of March 29, 2019, Spitz had obligations totaling $1,481 under its two mortgage notes payable.

 

Item 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected.


18



Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the three months ended March 29, 2019, or subsequent to that date, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

 

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS  

 

In the normal course of business, we become involved in various legal proceedings.  Although the final outcome of such proceedings cannot be predicted with certainty, we believe the ultimate disposition of any such proceedings will not have a material adverse effect on our consolidated financial position, liquidity, or results of operations.

 

Item 6. EXHIBITS  

 

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.  

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.  

32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.  

101 The following materials from this Quarterly Report on Form 10-Q for the period ended March 29, 2019, formatted in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.  


19



SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

EVANS & SUTHERLAND COMPUTER CORPORATION

 

 

 

 

 

 

 

 

 

 

 

 

Date:

May 10, 2019

By:    /s/ Paul Dailey

 

 

Paul Dailey, Chief Financial Officer

 

 

and Corporate Secretary

 

 

(Authorized Officer)

            

 

(Principal Financial and Accounting Officer)


20

 

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